ARTICLE 4: Quantitative Easing Simplified & Investment Predictions for the future - Coronavirus (COVID-19) pandemic? By Shane Hindocha
In these uncertain times, it is important to look ahead, stay attentive and proactively navigate your way through the turmoil.
My name is Shane Hindocha. I am a father, a husband, an active property investor & an entrepreneur. I have lived through 2 recessions already. If we are going down this route (recession) again, a blend of hindsight and foresight is welcomed. Whilst my outlook on life is generally positive, I will remain objective and then form an opinion.
My aim is to break complex information down into digestible and easy-to-understand formats…and in particular, how the current situation will affect property prices in the UK.
You can connect with me on the following platforms:
Follow me on Instagram: https://www.instagram.com/shanehindocha/
Follow me on Facebook: https://www.facebook.com/shane.hindocha
Follow me on Linked In: https://www.linkedin.com/in/shane-hindocha-6000a919/
Follow me on Twitter: https://twitter.com/shanehindocha
Follow me on Tik Tok: https://www.tiktok.com/@shane.hindocha
Quick Summary of current Affairs
Lowest ever interest rate = 0.1%
A fresh £200bn of money creation announced via Bank Of England’s quantitative easing
£6bn of extra support announced by Rishi Sunak
BUT WHAT DOES IT ALL MEAN??
In my last article, I discussed how a lower interest rate affects the economy. Well it is at its’ lowest now. The thing I didn’t explain is quantitative easing.
Quantitative Easing (QE) Simplified
So, what is this?
First introduced in UK in 2008 during the Great Recession.
The aim = very simple = Help economic recovery by injecting money into the economy.
But where does all this money come from??
Well, the Bank of England (BoE) just magically print it!...or should I say magically digitally create it with a few strokes of a keyboard! (yes, no ink costs involved now!)
The bank simply credits themselves with these electronic funds….ta daaa!
But why and what does it do with this money?
It purchases bank assets & government bonds (large-scale asset purchases) to increase liquidity in the financial market. Simple right? No.
When this QE happened in 2008, I asked so many people to simplify this for me…and everyone was giving me this default answer & I still didn’t quite get it…so allow me to offer you my understanding of this, so you don’t “kind of” get it. You actually get how this whole thing works!
Ok, well first, let me rewind a little and talk about…institutional investors.
Institutional Investors
An institutional investor is a company or organisation (commercial banks, insurance companies, pension funds, hedge funds, REITs, investment advisors, endowment funds and mutual funds)
that pools money from clients (customers, members or shareholders)
and then invests that money on behalf of these people
by buying securities, real estate and other financial assets.
Why do their clients give them money? = Because these institutional investors will invest their money & give them a return. So the institutional investors have a duty to invest their money wisely and they have huge reputations to uphold….because a bad reputation won’t attract new money from old and new clients.
So, the BoE uses this newly created money to purchase assets from the institutional investors market.
It enters the market as a buyer by purchasing securities and assets (it buys govt bills and govt bonds from high street banks, purchases assets from pension funds, insurance companies & purchases private debts like corporate bonds – ps. corporate bonds are issued by companies that are looking to raise capital.)
So, the BoE uses this newly created money to buy assets from let's say a pension fund (institutional investor).
The pension fund now has a whole heap of cash (millions!)…so what do they do with it?
I think at this point I should mention that Institutional investors are considered wiser and savvier than the average investor and are often subject to less regulatory oversight…and because they have so much money, they can make some pretty big moves in the market (& these big moves actually attract lower fees for them!). They literally are the big fish!
So suddenly, this pension fund has just received lots of cash (because BoE has bought assets from them).
The pension fund needs to use this cash because they have to provide a return to their “clients” (external investors)…so the institutional investor now uses their “wiser knowledge” & cash to make more investments that will provide good returns.
It has been observed that BoE often buys things that these institutional investors don’t want to hold. The idea is that the institutional investor then has liquid to lend and buy company shares and bonds themselves that they think will provide good returns….and just like that, we now have movement in the economic market again. Voila!
…but what happens if the institutional investor decides that it is still too risky to go out and spend that money…and just hoards the cash? Well, this is where the clients and reputation comes in. They need to keep buying and selling in order to stay in business.
Nearly there…
So, the BoE now has magically created money, spent billions buying things…so the BoE now holds more assets, so their balance sheet increases….and because they bought these assets/bonds at high prices (to inject cash to the institutional investors) the prices of these assets have now increased and their yield (return on those assets) decreases. The higher the purchase price, the lower the yield.
The risk of an increased money-supply can lead to hyper-inflation and a lower currency strength.
More money in circulation, value of money falls. Hyper-inflation is not good news…but we will leave that discussion for another day!
Ok, now for some lateral thinking…
MY THOUGHTS AND PREDICTIONS OF THINGS THAT WILL PROBABLY DO WELL!
Dettol shares, ventilators, gas masks, long-life food and long-life drink companies
Anti-body testing kits
Private medical care (people valuing health more now and NHS being strained)
Netflix, Amazon Prime (more people at home in self-isolation binge-watching)
Delivery Companies (people can’t go out as freely, so you will have to get stuff delivered to you)
Digitalisation is the future
Risk-management industry (insurance) – people realise how uninsured and under-prepared they were for this will pay for the peace-of-mind-protection in the future
Cloud software will see rises in demand (companies that rely on intranet or physical sharing systems will realise how prehistoric this was...and will migrate to cloud)
Virtual Reality industry will see a boom (if we have to maintain social distance, this is the next best thing to physical reality)
Online meeting software will boom (apps like Zoom, WebinarJam etc)
It may force more entrepreneurs to take birth (if you lose your job / your job is in jeopardy, you may force the entrepreneur out of you for survival)
Businesses may realise that they don’t need the overhead of an office as more people adapt to work remotely
HS2 = £billions spent. The £billions more left to spend may be stopped and reallocated to spend towards NHS & public services.
Cryptocurrency resurgence. (If the current FIAT banking system is exposed and strained, people will flock to crypto, gold & silver).
Meditation Apps (more people will have the time to experience the benefits of meditation & this will drive the industry forward)
Self-education & personal development (people will have the time & motivation to pursue their passion...and learn to be prepared for future situations. This will fly forward. People don’t get to spend enough time with themselves. Now they are being forced to)
Self-motivation is key (previously collaboration, group energy and accountability (eg. time-keeping, attendance, targets, KPIs etc) was available during a recession. Now it is all about self-motivation)
Multiple sources of income and multiple customers will become mandatory
Diversified asset allocation will be more commonplace.
Property prices will come back with a vengeance
I think that is enough for now! Don't forget to watch my YouTube podcast: https://www.youtube.com/watch?v=iWOogRDpX98
Stay safe, remain positive and & be proactive.